An FIC is a private company, either limited or unlimited, where the shareholders are family members who typically hold different classes of shares. The parents will typically hold voting shares while the children would be issued non-voting shares with rights to receive dividends. The governing articles can be tailored to suit the specific needs of the family and cover the distribution of company profits, the return of capital, the transfer of shares and the appointment of directors.
The directors (usually the parents) will have the day-to-day control of the company and make relevant investment decisions.
In addition to facilitating the transfer of wealth to the next generation, the FIC can, if managed efficiently, reduce the family’s overall tax burden.
Benefits of an FIC
An FIC can be set up by transferring cash or assets into the company. The initial transfer of assets into an FIC is not subject to an Inheritance Tax (IHT) entry charge of 20% if the cash/assets exceed the nil rate band of £325,000. This makes the FIC more attractive to families than the traditional trust which limits the funds that can be settled free of IHT. Also, unlike a trust, there are no IHT 10-year charges or exit charges if and when capital is distributed.
The transfer by the parents of cash/assets into an FIC and the subsequent issue/gift of shares to the children can remove value from the parents’ estates and thus reduce the IHT exposure on their deaths. The gift of shares to the children will not be subject to IHT, provided that the parents remain alive for seven years from the date of the gift.
The profits of the FIC are charged to Corporation Tax (currently 19% but increasing to 25% from 1 April 2023), which is lower than the rates of Income Tax and Capital Gains Tax (CGT) for individuals. Holding investments through an FIC rather than personally can result in significant tax savings for the family.
The value of the FIC shares held by the shareholders can be discounted for IHT purposes because they usually hold a minority interest in the company. This can result in a significant IHT saving on the death of a minority shareholder.
Disadvantages of an FIC
An FIC can be tax inefficient if all of the company profits are paid out to the family as this creates the potential for double taxation. The company pays Corporation Tax on its profits and then the shareholders will pay Income Tax when profits are distributed in the form of a dividend. The FIC is therefore more tax efficient if the profits are retained in the company.
If assets rather than cash are transferred into the FIC, this may trigger a CGT charge, and if property is transferred, this could trigger a Stamp Duty Land Tax charge. A transfer of cash is by far the best option to minimise the family’s tax exposure.
The set-up costs and ongoing administration, such as completing annual accounts and Corporation Tax returns, can make an FIC unattractive and therefore, the FIC is recommended for initial investments in excess of £1 million.
An FIC will not be suitable for all families but if you wish to discuss how a family company could benefit you and your family please speak to Kay Mind, Director, or your usual contact at haysmacintyre.
FAQs
Disadvantages of family investment companies:
Gifting property with large gains could result in both a CGT charge and an IHT charge should the founder not survive for a 7-year period. Managing a FIC involves a considerable amount of administration, and the ongoing running cost could be high.
What are the disadvantages of a family investment company? ›
Disadvantages of family investment companies:
Gifting property with large gains could result in both a CGT charge and an IHT charge should the founder not survive for a 7-year period. Managing a FIC involves a considerable amount of administration, and the ongoing running cost could be high.
What is the purpose of a family investment company? ›
Typically they are set up by older generations wishing to protect family assets and transfer wealth to future generations. Such assets may eventually be seen as lifetime gifts, even though they still want to benefit from the income.
What is the difference between a trust and a family investment company? ›
A family investment company is essentially a private limited company with an objective to be employed for family estate planning purposes. Rather than a trust deeds a family investment company will have articles of association and can have separate agreements between shareholders who are typically family members.
How to create a family investment company? ›
The process of setting up a family investment company involves creating a legal entity, drafting a company constitution, appointing directors, and transferring assets into the company. Professional advice from legal and financial experts is essential to ensure compliance with regulations and tax laws.
What are the drawbacks of working in a family-owned company? ›
A family business may lack opportunities for promotion that can enhance your career, when compared to a corporate job. You may have to fire a family member. If a family member misses work or does a poor job, you'll have to take action, which may be uncomfortable. You might not be able to take a family vacation.
What do investment companies do with your money? ›
An investment company can be a corporation, partnership, business trust, or limited liability company (LLC) that pools money from investors on a collective basis. The money pooled is invested, and the investors share any profits and losses incurred by the company according to each investor's interest in the company.
Can you pay dividends to family members? ›
Dividends can only be paid to shareholders, so for a family member to receive a dividend, they must be a shareholder.
What is the difference between a family office and a family holding company? ›
A family office typically helps manage the wealth, insurance, and trust and estate issues. A holding company is a portfolio of business equity stakes.
What is the alternative to a family trust? ›
An alternative type of trust popular with families is a testamentary trust which is created within your Will and does not come into effect until your death.
Instead a trust describes a relationship between various parties whereby a trustee or trustees (the legal owner) hold trust property on behalf of beneficiaries (the beneficial owner(s)). In the context of a Family trust the trustee holds the trust property on behalf of the nominated and general beneficiaries.
Why use a trust instead of a company? ›
Depending on the type of trust formed, business trusts may offer the following advantages over some traditional business structures: Avoidance of probate upon the death of the business owner. Reduction or elimination of estate taxes. Business continuity when the owner dies or become incapacitated.
How much does it cost to start an investment company? ›
It takes a significant amount of money to start an investment firm. The amount you will need to raise depends on the type of firm you want to create, the size of your team, and your business model. If you're starting a small firm with a few partners, you'll need to raise at least $1 million.
Can anyone start an investment company? ›
To start an investment company, you'll need to register with the Securities and Exchange Commission. You also must obtain a securities license from the state where you plan to do business. You may also need a broker-dealer license, depending on the products you plan to offer.
How do you set up a family holding company? ›
This is how it works, you establish a corporation giving yourself a relative majority of the stock and dividing the rest among the family members. For example, use your 100 shares 30 for you, 25 for your spouse, and 15 shares for each of your three children. You then give your assets to the corporation as a gift.
What is the main disadvantage to entering the family business? ›
Cons of Working for Your Family
Personal issues are easily carried into the work environment, and work issues may be carried back into home life. This may lead to family problems that impact the company and the other workers.
What are the disadvantages of investment holding company? ›
The advantages of a holding company include tax benefits and asset protection through diversification, as well as efficient management of multiple companies. Disadvantages of a holding company include complex legal structures and compliance requirements, as well as limited access to capital and funding options.
Which is not an advantage of a family business? ›
The correct answer is: c) reduced cost of control
There are many advantages associated with family-owned businesses, such as flexibility of work, commitment, trust and cultural integration.
What are the disadvantages of a parent company? ›
Likewise, the parent company often requires the entrepreneur to follow certain procedures in producing goods or providing services; this limits an entrepreneur's ability to develop his own strategies in managing the business. Creative entrepreneurs may find this situation frustrating.
